US Fed likely to raise rates by 150-200 bps in 2022; use dip to buy for 5 years

July 4th, 2022

In an interview with ETMarkets, Mehta said: “To reiterate, long-term investors should be using this weakness to buy into high-quality businesses and stay invested for the next 5 years,” Edited excerpts:

What is your take on markets – time to be cautious or greedy?
Global financial markets have been volatile and have trended significantly lower since the start of the year primarily driven by the actions and comments from the Fed about the extraction of liquidity from the financial system and steeper hiking of interest rates than previously anticipated.

It is now a given that rates in the US will rise another 150 to 200 bps between now and the end of the year.

While we are not macro forecasters, our sense is that the US Fed is likely to alter its commentary sometime in the fourth quarter of this year and that is the cue that equity markets in India will take as well.

While the next 3 months may see some further downside, for long-term oriented investors the present downdraft presents a very good buying opportunity to buy into strong durable franchises which will come through this period and get bigger and more dominant.

We will be completing the 6-months of 2022 and it has been a volatile journey for investors. What is your outlook for markets for the rest of the year? Will the markets fall over the short term to rebound? What are your views?
The very near-term is likely to be volatile and markets will be guided by the bigger global macro events. While there may be some downside, we do think that the latter half of the year will be better for equity market returns.

That said, investors should be taking a 5-year view and in that context, the present scenario provides a very good buying opportunity, though investors need to be selective and thoughtful in what they are buying.

Sectorally, Realty and IT sectors fell by more than 20% so far in 2022 – what is weighing on these sectors, and will the weakness continue?
The IT names have been stellar out-performers since the outbreak of the pandemic, and we have seen the entire sector getting massively rerated.

As the probability of a recession in the US is starting to increase, concerns of a slowdown in certain discretionary IT spending coupled with very high valuations are reflected in the price action.

Rising interest rates in India and macro concerns are weighing on other sectors such as real estate.

Power sector outperforms so far in 2022 do you have a view on the sector and why is it doing well?
As investors, we typically choose to avoid infrastructure names. Utilities have indeed done well this year, and this is a reflection of a larger swing away from growth to cyclical /value-oriented investments.

War, inflations, Yields, rate hikes, and crude oil still remain relevant evil for equity markets for the rest of 2022 – how should one be looking at the markets?
In any given 5-year period, there have always been dislocations, uncertainties, and other factors that seem to take centre stage and drive investor focus.

In fact, if one looks at India, from 2016 onwards, every year has seen some dislocation or other – demonetization, GST implementation, the ILFS episode in 2018, the great Indian slowdown in 2019, and then the Covid pandemic between 2020 and 2021, with 2022 being dominated by the events highlighted.

Our view is that from a 5–7-year perspective, many of these variables will play out and get reflected appropriately in stock prices.

High-quality businesses with dominant competitive advantages have the appropriate levers to pull in difficult periods and we believe that they in fact will come through this period and go on to become larger and more dominant.

Do you feel that FIIs outflows could stabilize or reverse in H22022?
Foreign investor flows are driven by a range of factors including sentiment, global macro conditions, global asset allocation, and the like.

India has seen relentless selling but unlike past episodes, strong domestic investor flows have acted as insulators.

As global macro conditions normalise, global investors will recognize the long-term structural opportunity in India, and flows will reverse, although trying to predict the timing of this is futile.

To reiterate, long-term investors should be using this weakness to buy into high-quality businesses and stay invested for the next 5 years.

Posted by Siddharth Mehta, Founder & CIO